The undervalued commercial sector poised to take off
Investors seeking an alternative property market sector could look at an asset class in which Australia's prospects appear far better placed than elsewhere in the world.
In the context of global commercial property, the Australian market has a segment worth paying attention to right now.
Analysis by JLL Research indicates the CBD office sector in the eastern capital cities may offer higher returns, at a potentially advantageous entry point compared to other core CBD locations globally.
Attractive price to earnings ratios
One way to understand how the office property market is performing is by looking at the price to earnings (P/E) ratio. The P/E ratio is typically used to value stock prices, to measure how expensive a company’s shares are.
In the context of real estate pricing, the P/E ratio can be measured by calculating an inverse yield. This can help us compare the price of an asset compared to the income it is generating, typically through rent.
A lower P/E ratio typically indicates a more attractive investment opportunity, as it suggests a shorter payback period for the initial investment.
JLL Research figures show that Australia’s three major core CBD locations – Melbourne, Brisbane, and Sydney – have P/E ratios of 14, 15, and 18 respectively, all below the global average of 21.
This positioning suggests these markets may be comparatively undervalued, potentially offering investors an opportunity to acquire prime assets at more competitive price points relative to other global cities.
What is in Aussie CBDs’ favour?
The appeal of the Australian office sector extends far beyond current valuations.
When considering long-term value propositions, Australia’s economic fundamentals remain robust, with growth outpacing that of other advanced economies over the next 10 years.
Oxford Economics forecasts place Australia in first place for projected annual average Gross Domestic Product (GDP) growth among advanced economies. Additionally, Australia’s population growth is also expected to be the strongest among other advanced economies over the same period.
These economic and demographic factors could contribute to sustained demand within the office sector.
Australia also cements its position as one of the most transparent nations for real estate investing. JLL Research’s 2024 global transparency survey ranked Australia fourth globally for real estate investment transparency.
This is relevant considering that more than 80 per cent of global real estate investment is allocated to highly transparent markets.
Drivers of office demand
The Australian commercial real estate market showed resilience in 2024, with investment volumes increasing by 42.8 per cent compared to the previous year.
Within the office sector, transactional volumes in 2024 were up 59.5 per cent over the prior year. This increase occurred despite relatively high debt costs and broader economic uncertainty.
In 2025, there are potential catalysts for market activity.
With inflation now within the Reserve Bank of Australia’s 2-3 per cent target band and tight monetary policy beginning to unwind, increased liquidity within the office sector can be expected, ultimately leading to higher transaction volumes and support for asset values.
While challenges always remain, as investors survey the evolving commercial property landscape, Australia’s office sector should be seen as presenting opportunities.
Current market conditions could offer relatively favourable entry points into core Australian CBD office markets compared to other global core markets, while robust economic and population growth forecasts are expected to be tailwinds for the sector’s growth trajectory.
